Private Sector Development in Countries Progressing to Peace and Prosperity

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views expressed do not necessarily reflect the UK government’s official policies.

PRIVATE SECTOR DEVELOPMENT IN

COUNTRIES PROGRESSING TO PEACE

AND PROSPERITY

Peter Davis, Michelle Spearing, and Jodie Thorpe

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This assessment is being carried out by HEART, a consortium of: Oxford Policy Management, EDT

(Education Development Trust), IDS (Institute of Development Studies), HERA, WEDC, University of Leeds and LSTM (Liverpool School of Tropical Medicine), AGUA Consult, Mannion Daniels, Open University, Wise Development, Nutrition Works and supported by DFID. This report was managed by OPM.

The Team leader is Peter Davis. The remaining team members are Michelle Spearing and Jodie Thorpe. For further information contact [email protected]

The contact point for the client is George Skae [email protected]. The client reference number for the project is A1352-A2428.

HEART Clarendon House Tel +44 (0) 1865 207300

52 Cornmarket St Email [email protected] Oxford OX1 3HJ

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Executive summary

This report focuses on the specific challenges and opportunities of states that are making two challenging concurrent transitions, away from both extreme poverty and from conflict. First, they are ‘countries where the longer term prospects of the poor to escape poverty are overall good, but not necessarily secure or sustainable, and at risk of development reversals’ (Dercon and Lea, 2014). Second, they are affected in various ways by conflict and instability and are addressing the challenges of maintaining peace. This report is based on studies in six such countries with the aim of providing evidence, conclusions, and recommendations on the developing of private sector development (PSD) strategies in such places. The countries studied are Egypt, Ethiopia, Lebanon, Nepal, Myanmar, and Sudan. The report builds on previous research, including an earlier study under the UK Department for International Development’s (DFID) Policy Research Fund looking at the challenges of PSD in lower-middle-income countries (Davis., 2016).

The regional setting for these countries has significant implications both in terms of economic development and conflict. Conflicts in a country’s neighbours will mean that previously prosperous trading partners disappear and also that trade routes to the wider region are disrupted. Conflict in a country’s ‘neighbourhood’ may also have serious spillovers, for example in creating large numbers of refugees, which in turn have a destabilising effect domestically. Furthermore, fear that regional instability could affect national stability has significant impacts on domestic politics and the decisions that are made.

At a domestic level, these transition countries face serious challenges. Most obviously they are typically run by oligarchic elites that operate more for their own benefit than for that of the country as a whole. Much political energy goes into managing the interests of these elites rather than into focusing on and addressing the country’s development challenges. This challenge of political focus is aggravated by often-challenging administrative and legal processes. Public officials are frequently appointed on the basis of connections rather than qualifications, meaning that, even when reforms are attempted, the capacity to see them through is often lacking.

These national-level challenges spill over into the private sector, restricting its capability to grow effectively and to create jobs and income. A core challenge is that elite control at a political level also exists in the private sector, with the result that key sectors and important companies are controlled by politicians, the military, or others connected to the ruling regime. This has a number of effects. First, these companies frequently fail to deliver often-important services to the wider economy and stymie reform. Second, it means that large parts of the private sector may be operating in an opaque manner. Third, there is often a fear in the wider private sector that if they grow too big, or identify an interesting new commercial opportunity, this will be snatched up by elites. Companies also face significant challenges with the regulatory environment, with laws which are either highly problematic or not properly enforced. The private sector is also typified in these countries by a ‘missing middle’. There is a lack of medium-sized companies to link small and medium-sized enterprises (SMEs) to opportunities with larger firms. Regional inequities can mean that commercial activities take place predominantly in a small number of large commercial hubs, with little going on in neglected, often rural, settings.

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It is clear that, for PSD practitioners, the usual toolbox of solutions is not sufficient to meet the challenges that exist. These include firstly a focus on macroeconomic stability, which though technically not part of a PSD portfolio is necessary to provide support to countries responding to significant instability. Reform of the regulatory environment is a key challenge in these countries, but making change happen is complicated by elite control and poor implementation capacities on the part of public servants. As a result, much PSD effort goes on firm-level activities, to support companies to survive and expand even in a problematic wider context. It is also clear that in these contexts, PSD programming needs to be very closely tied to other streams of development activity, in particular interventions on issues of governance and peacebuilding. However, factors such as education and infrastructure are also important to the longer-term development of the private sector, and therefore PSD needs to link closely to activities in these areas too. Programming needs to be flexible and adaptive and responsive to change as it happens, as well as needing to pick up and exploit opportunities as they arise. The combination of conflict and middle-income challenges often make the reform agenda seem huge and undoable. By focusing on what might be relatively small areas of reform, practitioners are in a better position to make change happen.

In fragile contexts, the private sector is inextricably interwoven into the conflict dynamics. PSD practitioners need to maintain clear sight of the these dynamics in the places where they operate, while those working on other areas of development also need to understand the private sector and see PSD activities as a priority. Economic activity will not solve conflict, but nor can PSD and broader economic growth wait until conflict is resolved. PSD activities in middle-income countries need to focus on several different aspects of ‘the private sector’ – ranging from large international investors and diaspora businesses to smaller SMEs. Each will have a different role to play, and different interests: all need to be accommodated. Practitioners need to be pragmatic in their approach, and base what they do on detailed and ongoing conflict and political economy analysis. These are crucial to

ensuring that interventions are focused on the right issues, and to identify where leverage for change might exist even in a generally challenging context.

This study shares many of the conclusions of the 2016 study looking at lower-middle-income countries. These include: challenges with elite control and the impact this has on the growth of the private sector; a poor and opaque regulatory environment; and the need to see PSD programming as part of an overall approach in a country, in particular with interventions focused on good governance. However, this study has also identified significant additional issues stemming from the addition of conflict dynamics. First, the regional context in which a country exists is extremely important, meaning programming needs to consider the regional as well as the national context. Second, the implications of conflict may lie as much in the fear of instability as much as in the reality of it. Third, and most importantly, the conflict dimension means that the stakes are much higher. The skein of interests and networks that prevents a fragile situation getting worse is complex and often opaque. Development

programming needs to be very sensitive and undertake detailed and appropriate analysis to ensure that interventions improve the situation or at the very least do not destabilise the status quo.

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List of abbreviations

ADB Asian Development Bank

CDC Commonwealth Development Commission DAC Development Assistance Committee DFID Department for International Development EAOs Ethnic armed organisations

EPI Economic Policy Incubator

FCS Fragile and Conflict-Affected States FDI Foreign direct investment

GERD Grand Ethiopian Renaissance Dam

HEART High-Quality Technical Assistance for Results IFC International Finance Corporation

IMF International Monetary Fund

MCRB Myanmar Centre for Responsible Business

OECD Organisation for Economic Co-operation and Development PIDG Private Infrastructure Development Group

PPD Public–Private Dialogue PSD Private sector development SDG Sustainable Development Goals SME Small and medium-sized enterprises SWFs Sovereign wealth funds

UNHCR United Nations Refugee Agency

USAID United States Agency for International Development WBG World Bank Group

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1 Introduction

The international development community is seeking ways to address two particular

challenges: how to support development in middle- and lower-middle-income countries, and how to deal with fragile and conflict-affected states. This report presents the findings from a research project that studied countries which fall into both of these categories, i.e. which are both middle- and lower-middle-income and fragile. The research was undertaken between November 2017 and June 2018 and was supported by the DFID Policy Research Fund. It was primarily qualitative in nature and builds on a previous research project supported by DFID (Davis et al., 2016) looking at the challenges facing PSD practitioners in lower-middle-income countries progressing to prosperity. This research project incorporated both desk-based research and in-country case studies of six locations: Ethiopia, Egypt, Lebanon, Myanmar, Nepal, and Sudan. The objective of this research, as defined by its terms of reference was ‘to provide evidence, conclusions and recommendations which will guide DFID and other donor organisations in developing PSD strategies for countries progressing towards peace and prosperity’.

The increased focus on the part of the development community on middle-income countries reflects the fact that as many as two-thirds of the world’s poor now live in these countries. Yet these places exhibit a very particular set of development challenges and many become stuck in the ‘middle-income trap’, i.e. they find it hard to progress from middle-income to high-income status. Fragile and conflict-affected states also present very particular

challenges. They are significant both in their own right – it is estimated that one in five of the world’s population live in countries that are fragile or conflict-affected – but also because of the wider impacts of fragility: as many as 90% of refugees are displaced because of conflict and instability.

This study consisted of two phases: an initial review of existing literature and then a series of field research trips in each of our focal countries. The review of secondary literature covered two topic areas: first, the literature relating to the role of the private sector in fragile states and the perceived role of PSD in this; and, second, that relating to the challenges faced by middle-income countries, in particular focusing on the ‘middle-income trap’ and the causes of it. The literature on the private sector in fragile states remains relatively slight, with fewer novel additions to the corpus of knowledge than might be expected for such a significant and important topic. With a few notable exceptions – for example, a study by GIZ (Schrade et al., 2016) of the role of PSD and the private sector in active conflict – much of the recent

literature merely reviews previous studies rather than explores new ground. By contrast, the literature on the challenges facing middle-income countries is larger and there have been more recent, substantive contributions to the debate.

Selecting case study countries for this study proved complicated. In the first instance was the usual challenge of case study research that no set of cases can ever be representative of all countries in transition and therefore criticism could be made of any country case choices made. However, in the case of this research, a particular challenge was posed by the question of exactly what is meant by a ‘fragile and conflict-affected state’ (FCS).1_Some

countries are obvious – Afghanistan, for example – but lists compiled by international

agencies differ. The World Bank list for example is quite binary, with countries being labelled as FCS if they fall below a certain score on the Bank’s country assessment. DFID’s

categorisation is more nuanced and lists countries by level of fragility, also including

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countries that neighbour fragile states. It was eventually from this list that country cases were selected, focusing on those countries that are listed as either ‘medium’ or ‘high’ fragility. From within this list, the following criteria were used to identify case studies:

 Research risks: The team collectively agreed that we would avoid field visits to countries in which active conflict would pose a risk to researchers.

 Proximity to conflict: While countries with widespread hot conflict were to be avoided it was important to survey countries that are not too far past conflict.

 Causes of conflict: Azar’s (1990) ‘levels of analysis’ approach argues that conflict causation can be seen as having international, national, sub-national, and local causations. So far as possible, this study encompassed conflicts that include different levels of causation.

 Stage of transition: As in the previous study (Davis 2016), it was important to

understand where countries are on their journey to and beyond middle-income status.

 Different geographies: The case studies needed to be drawn from different geographies rather than being all from one continent.

 Regional considerations: Both the FCS and middle-income countries literature make clear that international links are important. It was important therefore to explore in the field visits the degree to which regional factors were important for countries’ economic and stability trajectories.

 Availability of data: There is little point in doing a case study if there is little or no information readily available. It was important therefore to choose countries to study where data of a decent standard were available.

This set of criteria eventually led the research team to identify six target countries, drawn from three regions, as follows:

 Asia: Myanmar, Nepal

 Horn of Africa: Ethiopia, Sudan

 Middle East: Egypt, Lebanon

Country research trips took place in spring 2018 and consisted of interviews with key people and organisations in the subject countries. Key stakeholders to engage with were identified before the country mission, with the considerable and welcome support of British embassies and high commissions. These were supplemented by use of the co-called ‘snowball

sampling’ approach, with initial interviewees being asked to recommend others to speak with. To reduce the risk of bias, the team needed to ensure that our interview process reached as broad a cross-section of relevant stakeholders as possible. Typically, interviewees included the following:

 DFID country office, including previous heads of office and advisers as appropriate;

 Other representatives of the UK government, for example Foreign and Commonwealth Office staff;

 Other bilateral development agencies and missions;

 The International Finance Corporation (IFC) and other relevant development banks;

 Representatives of the private sector, including foreign investors, local firms, SMEs, etc.;

 Business membership organisations; and

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The findings of this study were, understandably, multifaceted and complex. To provide a coherent narrative, the research team used the following organising structure to organise the data on each country, and for the study overall:

 Regional context: What regional issues are relevant to, and impact on, the target country? This will include both issues relating to conflicts and inter-regional trade and investment.

 Country context: What stages are there for countries in their graduation from development aid, and can key ‘markers’ be identified which allow a judgement to be made on where a country is in this journey?

 Private sector: What sort of private sector is most desirable in developmental terms? Which contributes best to its host country’s progression? What challenges exist to the creation and durability of a private sector that contributes to wider development?

 PSD: Tasks and roles: What PSD modalities work best at different times to create stable states and a developmentally positive private sector? Which of the expanding range of partners are most relevant to deliver which interventions?

Figure 1: Mapping the role of PSD in countries moving toward peace and prosperity

Chapters 3–6 will therefore investigate each of these ‘rings’ in detail. Each of these analytical chapters, based substantially on the evidence generated by our country case studies, seeks both to assess the issues that have emerged and to make action-oriented recommendations that will be useful to development practitioners. The final chapter of this report then draws together overarching themes and conclusions from the research as a whole.

It is important to also note what this report does not do, and the limitations of its scope. First, and most obviously, as is inevitable with a study based on case studies, what has emerged from the six countries studied may not necessarily hold true for other locations. Second, while this report focuses on lower-middle and middle-income countries and what makes them distinctive, we did not conduct a comparative survey with countries at other stages of development. Finally, it is important to note that this report, though funded by DFID, is intended as a contribution to the development debate as a whole. It is anticipated that its findings (and indeed the questions arising from those) will be useful not just to ‘traditional’ donors but also to the numerous other actors now in the development space.

Regional context Country context Private sector PSD: Tasks and roles

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2 Research and policy context

This research focuses on two key issues: the role of the private sector in fragile states, and the challenges countries face in moving into, and beyond, lower-middle-income status. This chapter explores the relevant secondary literature and the policy context for both of these issues. Specifically, the aim of this study is to provide evidence, conclusions, and

recommendations on the development of PSD strategies in such places.

Increasingly, a key focus of the international development community is on FCS. As was pointed out in a recent GIZ study (Schrade et al, 2017), about 1.4 billion people – around 20% of the world’s population – currently live in countries in, or prone to, conflict. Moreover, 90% of the more than 60 million refugees worldwide (including internally displaced persons) are fleeing from violent conflict and human rights violations. Thus, many contexts of

development cooperation are affected by conflict, violence, and fragility, and accordingly approaches to development cooperation need to consider these circumstances.

At the same time, the international development community is shifting away from its historic focus on the world’s poorest countries. It is now clear that if donors wish to reach poor people, then they need to focus increasingly on vulnerable countries where poor people live. In 1990, less than 10% of the world’s poor lived in middle-income countries; by 2007 this figure had increased to over 70%. This change is in particular due to the move from low- to middle-income status of five countries: China, India, Indonesia, Nigeria, and Pakistan.

2.1 FCS

Poverty is becoming increasingly concentrated in fragile states. It is estimated that half of the world’s people surviving on less than $1.25 a day are found in fragile states. People in fragile states are more than twice as likely to be undernourished as those in other developing countries, more than three times as likely to be unable to send their children to school, and twice as likely to see their children die before the age of five. In 2013, the World Bank

reported that fragile states ‘continue to lag behind the rest of the developing world in meeting development goals’ (World Bank, 2013).

The donor community has therefore been increasingly focusing on these states from a development perspective, not simply looking at what can be done in peacekeeping and humanitarian terms. The UK government has been at the forefront of these developments, and has a clear focus: ‘Work to prevent and respond to conflict and fragility saves lives and reduces human suffering is essential for poverty reduction and progress against the SDGs [Sustainable Development Goals] and it can help to address threats to global and regional stability’ (International Development Committee, 2012). Other donors too are focusing their work: at the 2011 4th High-Level Forum on Aid Effectiveness, the major bilateral and multilateral donors committed to the New Deal for Engagement in Fragile States.

2.1.1 What are FCS?

Despite the development community’s increased focus on FCS, the definition of exactly what fragility is remains a matter of debate. As World Bank (2018b:) observed, since a list of FCS as states was first developed, it has ‘gone through a series of changes in terms of

classification. The concept and the list have evolved as the WBG’s [World Bank Group’s] understanding of the development challenges in countries affected by violence and instability

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has matured.’ This also remains a work in progress: a report from the World Bank’s

Independent Evaluation Group (2013) observed the need for the Bank to ‘[develop] a more suitable and accurate mechanism to classify FCS’.

Terms such as ‘conflict-affected’ and ‘post-conflict’, while widely used, can be unhelpful given how dynamic are the factors leading to war and instability. As World Bank (2004:8) concluded, ‘post-conflict countries face a 44% chance of reverting to conflict during the first five years following the onset of peace’. The Swedish development agency, Sida, uses what it terms an ‘integrated conflict perspective’ to reflect the challenge that conflict and tensions alter over time (see Figure 2).

Figure 2: Sida’s integrated conflict cycle

Source: Sida (2017)

However, fragility and instability are about more than conflict alone. As the recent report by the Commission on State Fragility, Growth and Development2_{observed, there are a range of}

‘characteristics of fragility, including the lack of basic security, inadequate government capacity, the absence of a properly functioning private sector, and the presence of divided societies’ (Commission on State Fragility, Growth and Development, 2018: 12). Moreover, conflict and/or instability may be geographically limited in any given country. This is true of a number of the countries included in this study: in Myanmar, although major conflict exists in Rakhine, and instability is present in a number of other areas, much of the centre of the country is stable. A similar situation of a stable centre and fragile regions is also true of Ethiopia. In Egypt, the Da’esh insurgency affects the Sinai Peninsula but rarely impacts on the country as a whole.

Nevertheless, it is clear that as some countries become stuck in a middle-income trap, others (sometimes the same ones) are stuck in a ‘conflict trap’. As the Cameron Commission says, ‘fragile societies are typically trapped in a syndrome of interlocking characteristics which makes it hard to make sustained progress’ (Commission on State Fragility, Growth and Development, 2018: 16). The Commission identifies a number of factors leading to this ‘fragility syndrome’. First, such states are often fractured into groups with opposing identities who see their struggles as a zero-sum game. Second, because of the oppositional approach that results, many citizens do not regard the state as legitimate and so do not comply with it. Third, compounding this, the state lacks the capacity to perform basic functions, such as service delivery, citizen security, taxation, and infrastructure. Fourth, identity politics and lack

2_{This is sometimes referred to as the Cameron Commission after one of its co-chairs, former UK Prime Minister,}

David Cameron. Submerged tension Rising tensions Violent conflict Peace and post-conflict

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of state capacity mean that a country has inadequate security, which is manifested in sporadic outbreaks of violence. All four of these problems then compound a fifth: the private sector is underdeveloped so that incomes are low and the economy narrowly based.

2.1.2 The private sector in FCS

A key recommendation of the Cameron Commission is to facilitate and stimulate the private sector, on the basis that ‘if the economy grows and drives up living standards, people acquire a greater stake in their society, and state revenues, capacities, and legitimacy all increase’ (Commission on State Fragility, Growth and Development, 2018: 20). This conclusion coheres with the wider and growing recognition of the importance of the private sector in FCS. A failure to do so risks undermining a country’s longer-term stability. As a background paper to the 2011 World Development Report argued, ‘it is important to move away from any argument under which sequencing would imply that security comes first, while private sector development-related reforms come later’ (Peschka, 2011: 41). Therefore, as was argued in the 2011 World Development Report itself, ‘we need to put greater emphasis on early projects to create jobs, especially through the private sector’ (World Bank, 2011:xiii).

According to the Donor Committee for Enterprise Development (2010), the private sector can contribute to FCS in four key ways:

 Supporting the creation of stability and trust: by supporting business across ethnic and other conflict divides, companies can help to foster trust and stability in the societies in which they operate;

 Fostering good governance: by ensuring that they are themselves well run, companies can underpin the need for good governance in FCS;

 Developing infrastructure: companies help to support the creation of both hard infrastructure (i.e. roads, etc.) and ‘soft’ infrastructure such as business networks and training provision; and

 Creating economic growth: the private sector is crucial to the development of a strong economy and economic growth, which provides income to individuals and drives tax revenues for host countries.

However, the private sector can also harm conflict dynamics. Keen (2009) explores the factors that may incline companies to be more or less prepared to engage in peacebuilding. He finds that enterprises engaged in low-technology, high-value commodities are indifferent to peace, provided these commodities remain extractable during conflict. Keen further finds that a minority of businesses – most of them either with access to means of violence or some other direct stake in the outcome of the power struggle that drives the war in question – are more profitable during conflict. Therefore, they may have an interest in preventing the re-establishment of peace: these are businesses, for example, that make higher profits from opportunities in food trading at times of artificially high food prices, arms trading, drug trading, and natural resource exploitation. By contrast, Keen finds that businesses affected by reduced production and weakened local demand during war – mostly in the industrial and agricultural production and services sectors – have the strongest interest in peace.

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2.1.3 Different elements of the private sector: different impacts

The ‘private sector’ is not a single entity but is rather made up of a wide range of very

different entities, each of which interact very differently with a conflict context. As Brück et al. (2012:4) put it, ‘the impacts of conflict are geographically varied and the impact of violent conflict on entrepreneurs and firms will differ across a country or region’. A number of different aspects of the private sector are explored in the literature.

Foreign investors

Historically, views have been mixed regarding the impacts that international companies have on conflict dynamics. Wenger and Moeckli (2003:5), for example, argue that ‘corporations have long been accused of causing or exacerbating conflict through their business

operations’. Nevertheless, some studies demonstrate that foreign direct investment (FDI) can have positive, beneficial impacts on conflict dynamics. Lee and Mitchell (2012:675) conclude that ‘higher bilateral FDI flows between two disputants significantly reduce the chances for escalation to high levels of violence over issues and improve the chances for peaceful management’.

It is often the extractive sector that finds itself in the spotlight in FCS. However, in Bray’s (2005:vi) view, larger companies are likely to be unwilling to enter conflict or post-conflict environments because ‘in the year or two after the conflict ends, it is rarely worth taking high risks for returns which are, on the scale of these companies balance sheets, likely to be marginal’. However, by contrast, the so-called ‘mining juniors’ – smaller firms that market themselves to investors on the promise of high returns – are likely to enter post-conflict markets. These companies’ risk management processes may not always be as attuned as those of their bigger cousins to limiting their impact on conflict dynamics.

Beyond the extractive sectors, it is frequently those companies in the agribusiness, food and beverage value chains that operate in FCS. According to World Bank (2014), Coca-Cola is one of the 10 companies with the most investments in fragile and conflict-affected situations and offers a number of well-documented examples of development multipliers. Other

multinationals such as Nestle, Unilever, PepsiCo, Wal-Mart, Olam, Danone, and DSM are also investing in projects in FCS.

The telecommunications sector is one of the few in the non-extractive sectors to attract sizeable and early investment and to demonstrate high rates of growth in FCS. As Bray (2005:41) points out, ‘mobile phone companies have shown themselves willing to move into post-conflict economies as soon as the fighting ceases’. As a result, rapid increases in access to telephony were recorded even in countries with very difficult business

environments or with ongoing conflict and a high incidence of poverty. For example, 38% of Afghanis and 34% of Sierra Leoneans had a mobile phone subscription in 2010, up from 4% and 14%, respectively, in 2005. The growth of mobile networks was largely driven by private investment, and accessibility increased due to competition.

Banks differ from other sectors in that their exposure is indirect rather than direct. A bank’s own footprint in a fragile state may be confined to a small office. However, the exposure lies in funding other companies and projects that are themselves vulnerable to the impacts of conflict. Moreover, the often-problematic legal framework in these countries poses

challenges in terms of security of collateral, as well as in terms of the processes of banking oversight and regulation.

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Regional multinationals

There are a range of companies that are not known internationally but that invest in countries in their ‘back yard’. This category includes, for example, companies from Beirut investing in other countries in the Middle East and companies from Morocco and Nigeria expanding into other places in west Africa. The reason for this careful expansion is that these companies believe they have sufficient affinity with their target markets because of their similarity with their home market. By contrast with global multinationals, these

companies may not have as wide a choice of investment markets; nonetheless, they have some flexibility and can scale up or scale down their activities in a range of countries depending on particular circumstances. They, too, may have options to leverage assets in stable countries to facilitate business in fragile states. For example, a bank may use collateral in western Europe or one of the Gulf States to secure a loan in somewhere like Iraq.

Local companies

Avis (2016:5) argues that ‘the local private sector is considered to have a range of motivations for wanting to address fragility and conflict’ because, unlike international

companies, they have no alternative but to operate in the conflict-affected state and so suffer most from its impacts. He cites a number of advantages in engaging local private sector organisations. First, they tend to be more labour-intensive than large firms and maintain more linkages with other local enterprises; second, they operate in different locations and therefore provide a stimulus for regional development; third, they are easier to deal with for national and local governments; and fourth, as the local private sector operates less

internationally, local organisations are more likely to invest and expand locally.

However, it is clear that local companies are often caught up in the dynamics of a conflict, as demonstrated by the situation that has existed in Afghanistan. Giustozzi’s (2006) study of the private sector there identifies that in many cases companies turn to the local ‘mafias’ and warlords as a way of getting things done in a context where ‘official’ authorities are seen as too weak, incompetent, or corrupt to provide useful service. As a result, relationships between business people and mafia ‘have evolved into forces that reduce opportunities for longer term growth and a more rounded social role for business’ (226).

2.1.4 The role of donor-led PSD and other programming

Given these different motivations and impacts, how should donors react? Focusing on those elements of the private sector for which peace and security are commercially beneficial is crucial. As has been noted elsewhere, some companies benefit from conflict and thus it is important for PSD and other development professionals to be aware of the dynamics of the private sector in this regard. A key challenge is being able to attract and encourage

companies given the significant risks involved. As Peschka (2011:8) observed, ‘in the absence of basic security … businesses are reluctant to make the long-term investments that spur economic growth and generate the jobs so desperately needed in these

challenging contexts’.

Regulatory reform

At the most basic level, companies want to be sure that their investment in a country is secure and that, at the very least, they will be able to recoup that investment. Evidence

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suggests that developing economies with better business regulations achieve faster annual economic growth rates. For example, according to Samuels (2006:12), ‘rule of law is

essential to economic development and poor enforcement of business contracts is damaging for countries rebuilding from conflict’.

Appel and Loyle (2012:689) argue also that putting in place processes of post-conflict justice (such as truth and reconciliation commissions) allows states to ‘send a costly and credible signal to international investors about the state’s willingness to pursue the successful reconstruction of the post-conflict zone’. In their view, establishing post-conflict justice structures, which is a hard thing to do, sends the message that the host government is serious about change and reform and as such ‘can act as a signal to reduce investor risk’.

Blended finance as a tool to reduce risk

The literature also explores the degree to which new ‘blended finance’ approaches to development might help address the issue of perceived and actual risk in FCS. Cusack and Tilleard (2013), for example, point to the potential for sovereign wealth funds (SWFs) to act as a process for providing investment and encouraging other private sector entities. The same point is made by Torjesen (2013), specifically in relation to the Norwegian sovereign wealth fund Norfund. Her analysis is that investment in post-conflict countries is often concentrated into a few sectors and often only appears several years after the conflict has come to an end. Norfund, she argues (and, by extension, other SWFs), is in a position to be able to provide funding more immediately after a conflict has come to an end, and to

stimulate investment in a wider range of sectors and therefore spread risk in the economy. Ideally, entities such as the IFC should play a coordinating function, as in a project to develop local supply chains. The IFC (and indeed the World Bank and United Nations agencies) has political credibility and convening power, and therefore is well placed to bring different partners together and to find joined-up ways of dealing with at least some of the challenges companies face in operating in FCS. Cusack and Tilleard (2013) make a strong case for international development actors to facilitate private sector investment in FCS, for example by acting as co-financer or as a shared hub of knowledge on which a number of companies can draw.

Building capacity

The ability of governments in fragile states to operate effectively is crucial. Focusing

specifically on the issue of natural resource management in Africa, Besada (2013:2) argues for the ‘critical importance of governance – the deficiency or effectiveness of public and private sector institutions – as the key to understanding the prevalence or absence of violent conflict’. He cites the example of Debswana, a joint venture between the Government of Botswana and the mining firm De Beers. This firm is key to the diamond sector, which accounts for about half the country’s tax revenues. As part of a strategy to diversify the economy, Debswana has also made investments in tourism, farming, and education, thereby using ‘diamond revenue for economic development objectives, infrastructure development and poverty alleviation programmes’ (Besada, 2013:39).

Frequently, however, a challenge facing the private sector in fragile states is a lack of capacity in the governmental structures of those states. Whatever the regulatory framework may be, in many cases the structures through which those regulations are implemented lack capability and capacity. Civil servants are sometimes unaware of their proper role and lack

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the necessary skills to do the job for which they are in principle employed. Alternatively, there may simply be a lack of properly qualified people. In Rwanda, for example, the effects of the Genocide are still being faced in that those people who might now have been middle- to senior-ranking civil servants are absent because they were killed in 1994.

Public–private dialogue (PPD)

A further challenge lies in developing relationships between the public and private sectors. Nelson (2014) argues that in fragile states and post-conflict economies, there is often deep mistrust between the government and the private sector, resulting from prevalent rent-seeking behaviours, cronyism, and lack of legitimacy. To overcome the lack of transparency and to create trust and confidence, it is imperative to engage the private sector in policy reform dialogue. Her work identifies a number of examples of good practice. For example, the Myanmar Centre for Responsible Business (MCRB) was established in 2013 to promote responsible foreign and domestic investment and business activities, with support from six donor governments, the Institute for Business and Human Rights, and the Danish Institute for Human Rights. MCRB works with government ministries, the Myanmar Investment Council, the Union of Myanmar Federation of Chambers of Commerce and Industry, foreign embassies, and various foreign investors like Total, Coca-Cola, Western Union, and

Chevron.

Utterwulghe (2014) argues the same case that PPD mechanisms have demonstrated ‘that they are effective trust-enabling platforms that allow all relevant stakeholders to work jointly in a transparent way on the identification of PSD constraints and the creation of sustainable policy reform solutions’(25). As Lemmon (2012:15), looking at business development in fragile states, concluded: ‘Partnerships among governments, non-profits, and corporations are critical. Long time frames are also important because sustainable SME growth is a long-term process that requires capacity building and the development of local business

environments. There should also be greater information sharing of lessons learned and efforts to scale solutions that have been successful’.

Firm-level interventions

It is also apparent that firm-level interventions are highly relevant. Based on GIZ’s

experiences in the Palestinian Territories and Yemen, Schrade et al. (2016:22) argue that PSD has a role to play even in situations of hot conflict, providing benefits both in terms of economic development and peacebuilding. Indeed, in their view, ‘PSD has a huge

comparative advantage to other development sectors (e.g. education, rule of law, or good governance) when it comes to contexts of open and sustained violence’.

A special issue of the Journal of Conflict Resolution (57/1) looks in detail at both the need and type of support required by entrepreneurs in conflict-affected and post-conflict states. This set of articles identifies three sets of policy implications. First, given the varied impacts of conflict, there is a need for support to be geographically specific. Second, given the need for companies to adjust to the realities of conflict, PSD policies that support companies in being adaptive so that they survive the conflict are vital. Third, because companies provide a means for economic growth and post-conflict employment (for example of ex-combatants), support to the private sector as a key part of peace deals can be an important element in making sure that those accords actually endure.

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2.1.5 Approaching PSD in FCS

As well as commenting on the types of intervention that are most useful in FCS, the literature also looks to a significant degree at how those interventions need to be structured, as well as what different factors need to inform the way in which PSD and other programming needs to be managed and undertaken.

Monitoring and evaluation

A key difference in undertaking PSD activities in an FCS context by comparison with a ‘normal’ location is the need to focus on different – or, rather, additional – metrics. In most PSD programming, ‘success’ will usually equate to factors such as increases in the number of jobs or growth in levels of income. However, looking only at economic data in FCS is not sufficient, as ‘success’ on an economic level might come at the expense of worsening the conflict dynamics. In a study of privatisation in post-conflict countries, Venugopal (2014:1) concludes that the success of such programmes is generally seen through an economic prism, ‘such as the dollar value of privatisation receipts, increases in firm-level output, or productivity’. In his view, however, the reality is that this approach actually causes much greater problems in peacebuilding terms by entrenching inequities in society and thereby aggravating conflict dynamics.

Indeed, Schrade et al. (2006:14) argue that there is a need to go further. As well as ensuring that interventions are based on proper peace and conflict assessments, as well as designed according to the ‘Do No Harm’ principles, there is also a need to monitor potential risks in real time. In regard to its operations in the Palestinian Territories and Yemen, GIZ has developed a ‘risk log system [that] allows close monitoring and immediate action if a specific activity proves to drive conflict or violence’.

Balancing urgency and legitimacy

A further issue highlighted in the literature is the tension, especially in post-conflict situations, between getting things done swiftly and getting them done in a way that builds legitimacy and buy-in from local audiences. As Channell (2010:5) argues, ‘donor organisations often rush to re-establish the framework for doing business, from rebuilding roads and

marketplaces to revising laws and regulations’. The challenge with this, he argues, is that laws developed in such a way are not seen as legitimate – ‘effective policy reform … takes time in order to negotiate the human dynamics’. In his view, the key to this is the existence of a strong voice for the private sector, as ‘the business community knows better than any other group what constraints are standing in the way of business’.

Jones and Howarth (2012) argue that short-term programming, however well intentioned, can be damaging to longer-term sustainability. Looking specifically at infrastructure projects, they criticise the ‘Quick Impact Project’ approach undertaken in Iraq and Afghanistan since ‘the approaches necessary to carry out implementation (for instance through construction undertaken by the military) may undermine the scope for local ownership through community consultation and participation’.

2.2 The challenges facing middle-income countries

In the past decade, the challenges facing middle-income countries in continuing their

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to have been used to describe apparent growth slowdowns in many former East Asian ‘miracle’ economies (Gill and Kharas, 2007). A variation on the term had also been used in 2006 about the sustainability of China’s economic development (Pei, 2006).Since then, the phenomenon by which countries rapidly acquire middle-income status only to stall at that point has been observed by several studies. Robertson and Le (2013:7) conclude from their analysis that ‘the growth trajectories of a large number of current middle-income countries are consistent with what we would expect to observe if they were in a middle-income trap’.

2.2.1 Inclusive growth

Supporting countries in continuing their progress from poverty is not simply about economic growth per se but also about ensuring that this growth benefits as wide a proportion of a country’s population as possible. This issue of inclusive growth is particularly pertinent to a study that focuses on the private sector given the considerable debate about whether companies promote pro-poor development or instead worsen inequalities. A recent statement by the EU (2014) argued that the ‘private sector can be an engine of inclusive growth by generating decent jobs, contributing to public revenue and providing affordable goods and services’.Likewise, according to an article by a senior Asian Development Bank (ADB) official (Venkatachalam, 2014), ‘the private sector promotes not just growth — it promotes inclusive growth’. A review of China’s development concluded that the private sector not only contributed to economic growth but also ‘helped the country to cope with the societal impacts of the decline in state industry’ (Hasan et al., 2009).

However, other evidence suggests that the private sector can fail to foster inclusive growth. CAFOD (2011:8), for example, concluded that ‘oil, gas and mining operations may bring considerable FDI but create relatively few local jobs’.Other studies also suggest that while FDI can be beneficial to overall GDP numbers, it does not necessarily create broader-based growth, which depends on a number of variables. These include, for example, the strategies of the investing companies and the extent to which they are prepared to share knowledge and expertise with domestic firms (Spencer, 2008). The ability of local firms to absorb the technologies and practices presented by foreign companies is also important. Foreign investment therefore has greater developmental impacts when domestic firms are larger and the technological gap between them and incoming companies is smaller (Zhang et al., 2010).

2.2.2 Key challenges in addressing the middle-income trap

What causes this stalling in progression from poverty? Studies by the International Monetary Fund (IMF) (Aiyar et al., 2013), World Bank (Dinh, 2013), ADB (Felipe et al., )and the

Organisation for Economic Co-operation and Development (OECD) (Jankowska, 2012 ) have all sought to understand which factors assist a successful transition and which hinder it. Drawing on all these studies, the key factors are as follows:

 Stability: This is seen as a sine qua non of continued development. Countries that are affected by war, conflict, or natural disasters will face significant challenges in

maintaining stable development.

 Political institutions and transparency: The institutional underpinnings of politics and the economy are of key importance. Four areas in particular are highlighted: size of government, rule of law, freedom to trade internationally, and the presence of effective regulation.

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 Structured development: Whether by government edict or through government allowing the private sector space, countries succeed where there is a structured but realistic approach to development.

 Economic management: Capital inflows are valuable, but macroeconomic stability is key, and public debt needs to be managed. Likewise, countries that rely too heavily on resource exports are also unstable.

 Industrial diversification: Countries that have graduated most swiftly and successfully from lower-middle to upper-middle and then to high-income status have been those which had a greater diversity and sophistication of exports.

 Internal and external resources and infrastructure: Inside a country, power, roads, and other infrastructure are essential, while a bulge in the working age ratio is also seen as an asset. External links are also important to success; for example, proximity to trade partners makes business more straightforward.

2.3 Issues for this study

This review of existing literature on FCS and middle-income states has identified a number of issues that this study will explore in more detail. These include the following:

2.3.1 Regional issues

It is clear from the literature on both middle-income countries and FCS that inter-country regional dynamics are a key factor, particularly in relation to commercial and private sector links. For example, middle-income countries are more likely to remain on their positive trajectory if they are located close to trading partners, while FCSs’ border disputes are more likely to be non-conflictual where there are mutual trade and commercial linkages.

Additionally, given that many conflicts are regional in nature or have regional impacts, the international dimension is one that needs to be examined.

2.3.2 Country context

As noted above, stability is seen as virtually a sine qua non if a country wants to progress beyond middle-income status. The presence of conflict or tension is therefore a crucial challenge. A central issue for this study to address will be how PSD and related interventions can be used to create and support stability. It is likely that this will need to consider both short- and longer-term activities depending on the stage and nature of conflict, and for these activities to be effectively joined up. However, this will be complicated by the fact that the situation may vary considerably in different parts of a country, reflecting the fact that a conflict or conflicts may be geographically limited.

2.3.3 The private sector

The structure of the private sector and the constraints to its development – at all levels from firm level to the regulatory environment – are key to the capability of states to maintain and develop from middle-income status. However, it is clear from the literature review that not all segments of the private sector will necessarily be supportive of peacebuilding. Some

elements may benefit from conflict (for a range of reasons) and there needs to be a clear assessment made of this. The literature stresses the need for robust conflict analysis when operating in FCS. However, in the case of PSD interventions, conflict analysis needs also to

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extend to an examination of how different elements of the private sector might be factors in the conflict.

The obverse of the above is to understand what structure for the private sector would be most beneficial to the stable development of the host country, and what challenges there might be to the development of that ideal. It is highly likely that the obstacles will be different for different aspects of the private sector. Foreign investors might be put off by perceived risk, whereas local firms might suffer from poor capacity or be hindered by elite capture of key elements of the economy. This study needs to explore what form of analytical framework would best serve to understand these issues properly.

2.3.4 Tasks and roles in PSD

It is clear from the literature that the issues impacting on the private sector are derivative of wider institutional and political challenges in a country. PSD programming therefore needs to be closely aligned with other streams of donor activity. This is not just to ensure an improved environment for the private sector but also to ensure that PSD programming is proactively supporting and buttressing wider conflict-management goals.

It is also clear that PSD programming needs to encompass all aspects of a country’s private sector, which will range from foreign investors to large national firms, through to SMEs and other local firms. As the literature demonstrates, facilitating the private sector’s ability to diagnose the issues it faces through developing PPD platforms is of significant importance. However, it is important to maintain ongoing relationships and to engage companies (for example, foreign investors) that may not be present at the start.

The literature also identifies a key role for blended finance mechanisms to reduce risk in FCS. Given that more donor governments are putting increasing amounts of money into vehicles such as the Private Infrastructure Development Group (PIDG), the CDC (formerly the Commonwealth Development Commission), and the Dutch Good Growth Fund, it is important to look in more detail at how this may best be achieved.

What is less clear, however, is where PSD programming should best focus. Given that many of the challenges companies face stem significantly from macro-level institutional issues, it may be most relevant for PSD to focus here. However, much of the literature points to the role of company- and market system-level interventions to provide the private sector with resilience and capacity at different phases of the conflict cycle. The current study will therefore have to establish the appropriate balance between macro-level interventions and those at a more local level, with different elements of the private sector and at different phases of the conflict cycle.

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3 Regional context

The literature strongly suggests that regional dynamics are important both in terms of a country’s ability to thrive economically and in relation to its conflict dynamics. Proximity to trade partners makes business more straightforward. Countries that are better positioned geographically – close to suppliers and customers, and on good trade routes – generally perform better than those which lack these advantages. As an IMF report observed, ‘the greater the GDP-weighted distance of a country from potential trade partners, the higher the probability of an economic slowdown. And the greater the share of intra-regional trade undertaken by a country, the less likelihood there is of an economic slowdown’ (Aiyar et al., 2013:26). In the area of conflict and instability too, it is clear that regional factors play a key role. Miall et al. (2004) propose a framework for understanding the sources of conflict, which suggests that there are different levels at which causation of conflict occurs. They propose a ‘levels of analysis’3 _{approach. In their view, conflict needs to be seen as caused by both}

international and domestic factors, which they refer to as International Social Conflict. These they define as ‘conflicts that are neither pure international (interstate) conflicts, nor pure social (domestic) conflicts, but sprawl somewhere between the two’.

3.1 Economic and conflict impacts, and their inter-relation

It is clear from the literature, and reinforced by the fieldwork for this study, that not only is it regional factors which have significant impacts on countries’ economy and conflict dynamics but also that these factors inter-relate to a considerable degree.

Several of our focus countries have seen markets and trade seriously limited by instability and tension in neighbouring countries. In the case of Sudan, relations with key neighbours Egypt, South Sudan, and Eritrea are extremely tense. Ethiopia has until very recently had an ongoing frozen conflict with Eritrea, which historically provided Red Sea access. Regional trade can also be limited where a country sits adjacent to a regional economic community and thus does not have the same advantages as other neighbours. For example, Ethiopia sits adjacent to the East African Community, which facilitates economic activity between Kenya, Uganda, Tanzania, Rwanda, and Burundi. Lebanon and Egypt have both seen regional markets disappear or become inaccessible because of conflicts in their region. This is most strikingly illustrated by the impacts of the Syrian civil war: for both countries, Syria was both an important end market and a transit route to the countries of the Arabian Gulf. Ethiopia’s landlocked status is a key determinant of its political and trading relations with neighbours. With until recently a longstanding frozen conflict since Eritrean independence, Ethiopia lost its access to the sea as well as potential for cross-border trade with Eritrea. In response, it has forged links with Djibouti, Somaliland, and more recently Sudan to secure port access and facilitate trade. For Sudan, tense relations with neighbours limit cross-border economic activity, including with Egypt and South Sudan. For both countries, communities in significant areas of the borderlands are pastoralist and share cultural and economic ties across borders; however, these are often marginalised communities in areas with little formal private sector activity.

Non-economic factors also have significant bearing on regional economic relationships. These factors include religious alignment (including an inclination toward forging a national

3_{In this they draw on Levy’s chapter ‘Contending Theories of International Conflict: A Levels of Analysis}

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Islamic identity in the case of Sudan) and linguistic ties (across the Arab world, for example). Also of relevance are a shared opposition to Islamist terrorism, desire to counter other powerful nations, and sometimes a shared opposition to ‘western’ interference. The last of these is illustrated by the case of Sudan being supported by others opposed to the

International Criminal Court and other restrictive international frameworks, including Kenya and other African Union members as well as Russia). In several of our case study countries, shifting political allegiances and economic ties align. For example, Sudan has experienced shifting allegiances within the Arab world, often falling into a different power bloc to its immediate neighbour Egypt. Tensions within the Gulf Cooperation Council and Sudan’s refusal to sever ties with Qatar when it was accused by its neighbours of sponsoring terrorism are an example of this. More recently, growing ties between Sudan and Turkey appear to have both trade and strategic intentions, with suspicions that Turkey may establish a military base on Sudanese territory (much opposed by Sudan’s neighbours) as well as becoming a key investor. At the same time, a softening of global relations with Sudan, lifting of sanctions, increasing focus on macroeconomic reform, and potential business linkages have been linked by some to a desire by western donors to forge stronger relationships with potential security partners as allies in countering extremism. Relations between Ethiopia and key western donors have the desire for stability and security in a broadly unstable region as a key driver. Power blocs, then, are more complex and overlapping than during the cold war, with alliances forged on religious and cultural grounds as well as security imperatives and the potential for proxy wars in the case of Sudan and Egypt/Eritrea within the broader region. Moreover, the policy and aims of neighbours can be highly influential on a country’s

potential. For example, Nepal’s most important strategic relationship is with India, with which it shares a 1,000-mile open border and strong historic, linguistic, religious, economic, and cultural ties. Nevertheless, political issues and border disputes strain this relationship. Nepal’s heavy reliance on Indian exports (fuel, for example) and on access to Indian ports has led to the country being described as ‘India-locked’ rather than simply landlocked. Some anti-Indian sentiment in the country is linked to perceptions of Indian meddling in Nepalese political affairs, most recently in regard to India’s effective five-month economic blockade of Nepal, which was linked to Nepal’s constitutional crisis in 2015. On the other side, the relationship with China has historically been much weaker, with the Himalayas acting as a major physical barrier. However, in 2017 Nepal joined China’s ‘One Belt, One Road’ initiative (allegedly against Indian lobbying for Nepal to stay out). Investment in infrastructure will lead to much greater connectivity in transit, roads, railways, trade, aviation, and power. The competing economic and strategic interests of China and India offer opportunities for Nepal; however, sovereignty concerns (potentially stoked by a protectionist domestic private sector) deter Nepal from fully benefitting from this strategic competition between its neighbours, undermining the potential for foreign investment in key economic sectors.

Myanmar sits at the heart of Asia, bordered to the northwest by the nations of India and Bangladesh, to the southeast by Thailand and Laos, and by the People’s Republic of China to the northeast. Myanmar’s neighbours, particularly China, are the country’s chief export markets and the source of inward investment. China, India, and Thailand, along with South Korea and Malaysia, compete to invest in oil and gas extraction. China is also investing in infrastructure, such as taking a majority stake in the major new deep-sea port of Kyauk Pyu in Rakhine State, as well as investing in a special economic zone located at the port. These developments will secure China’s access to the Bay of Bengal and could represent the first step in a new China–Myanmar Economic Corridor connecting Kyaukpyu and Kunming in

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China,4_{although deals such as these are frequently criticised for limited economic benefits}

within Myanmar itself .5_{At the same time as contributing to development, infrastructure and}

resource exploitation have been at the root of ongoing conflicts between the central government and ethnic minorities located mostly in Myanmar’s border areas.

The literature argues that geographic linkages are strengthened and underpinned by ‘social proximity links’ between people who collaborate over time. Innovation and growth does not just occur because companies and their people are physically close together, but because they get along and want to work together. As Lorenzen and Mudambi (2012:506) make clear, ‘decentralized personal relationships have remained the dominant linkage type in value creation… Value is created through flexible linkages between persons rather than rigid linkages between organizations’. However, in situations where conflict and instability has disrupted these ‘social’ links it may be that the economic effects of a conflict situation persist even after a conflict has ended since these networks may take time to re-emerge. If

prosperity comes to a degree from the interactions of individuals and companies, then disruption of these will be detrimental from an economic and business perspective. That said, it appears that in many cases diasporas provide a very valuable vehicle for maintaining these networks, contributing to economic growth even while instability persists. In the case of Lebanon, it is estimated that there are several times as many people around the world calling themselves Lebanese than the population of the actual country. Lebanese-run businesses operate all over the world and provide a well-established network for

commercial activity. In Ethiopia, diaspora return and investment has been a key feature in recent years. Some suggest that there is a tendency toward diaspora investment in real estate due to instability and fragility but also weak protections. Nevertheless, the creativity in diaspora-led business is evident in urban centres with businesses building on knowledge gained elsewhere, such as tech-based start-ups and design-based industries such as fashion and accessories. Furthermore, in Sudan it is evident that businesses adapt and expand based on extensive personal networks, including international networks, with big businesses forging partnerships internationally in order to gain new technical expertise and access to markets. The fact that the elite have travelled, lived, and studied internationally for several generations supports this.

3.2 The importance of infrastructure

From the perspective of trade and conflict, connective features such as dams, watercourses, resources, roads, and other infrastructure are extremely important. They can either be sources of opportunity and potential prosperity or they can be the focus of tension. It is extremely important therefore to consider infrastructure from a regional rather than just a national perspective. Building and supporting infrastructure that facilitates economic cooperation across borders is critical to long-lasting peace and stability. In the case of Ethiopia, which is dependent on neighbours for sea access, roads, railways, and port facilities are crucial. Recent initiatives have sought to improve cold storage along the main transit route to Djibouti while agreements to share port facilities are being forged with Somaliland and Sudan (which would require improved transport between Addis and Port

4_{Aung San Suu Kyi and President Xi Jinping agreed to establish such a corridor during a meeting in Beijing in}

December 2017: see https://amti.csis.org/kyaukpyu-china-indian-ocean/ (accessed 15 June 2018).

5_{Popular criticisms, for example, relate to the export of gas to Thailand while Myanmar is facing energy}

shortages. In addition, Khandelwai et al. (2018) found few direct economic spillovers from the special export zone at Thilawa near Yangon.

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Sudan). At the same time, infrastructure in some border areas, such as along the border with Kenya or South Sudan, is negligible, which limits even very localised economic activity across borders. Roads, water points, markets, and storage facilities could all facilitate cross-border market activity.

Egypt and Sudan are potentially hugely affected by the policies of those further upstream in the Nile basin, with significant changes expected due to the Grand Ethiopian Renaissance Dam (GERD). In the case of Egypt, there is a fear that short-term reduction in Nile waters will negatively impact agricultural production and there has been a sharp deterioration in relations between Egypt and Ethiopia as a result. Sudan, in contrast, stands to benefit from a better regulated Nile flow and has less to lose in the short term due to current

under-utilisation of Sudan’s Nile waters. Sudan’s apparent support for GERD has, however, increased tensions between Egypt and Sudan. More broadly, Egypt, Sudan, and Ethiopia are potentially impacted by other states within the Nile Basin Initiative, which exists in

recognition of the interdependency of states in the Nile basin (including the Great Lakes) and seeks consensus and cooperation.

In both Nepal and Myanmar, large-scale investments in infrastructure in ethnically controlled or marginalised areas also fuel tensions. The recent influx of foreign investment and the development of infrastructure and special export zones have exacerbated conflict in Myanmar.6_{Ethnic armed organisations reject central government land and resource}

allocation to investors in the areas they control. In Nepal, while infrastructure (much of which was destroyed in the civil conflict) is badly needed for economic development, there are persistent tensions over community rights. Exploitation of hydropower has stoked conflict between communities and hydropower developers supported by the government, such as the violence at the Khimti Dhaldkebar plant in April and July 2016.

3.3 Fear as well as reality

Fear of the regional context influences popular opinion and political actions every bit as much as the reality of the situation. This fear may be stoked and manipulated in support of domestic political objectives. For example, in Egypt the fear of ‘becoming like Syria or Iraq’ is a powerful driver to current political dynamics and some degree of toleration of the policies of President Sisi. In Sudan, tensions with Egypt, Eritrea, and regional powers in the Middle East foster a nationalistic tendency and bolster an inclination to maintain the political status quo, while in Ethiopia the mantra that the country is an island of stability in a fragile region (and the need to maintain this) has detracted attention from internal instability.

The legacy of previous conflict and instability is also of key importance in framing people’s outlook. The conflicts in Myanmar are related to control of territory, authority over

populations, and access to resources in the regions bordering China and Thailand, which have experienced persistent and widespread conflict for over 50 years. Central to the conflicts are contested visions of what constitutes the nation. In Nepal, historically marginalised groups – many of whom supported the Maoists in the civil conflict – are pressing for a greater voice in politics, a greater share of economic benefits, and a recognition of their cultural identity. While cross-border issues, including blockades,

6_{5.2 million acres of land have been given to investors for large-sale agriculture concessions (Asia Foundation,}

Private Sector Development in Countries Progressing to Peace and Prosperity